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Heico Seen As Big Beneficiary Of Above Average Air Traffic Growth

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Heico Seen As Big Beneficiary Of Above Average Air Traffic Growth

Bank of America Merrill Lynch sees Heico Corp (NYSE: HEI) as a direct beneficiary of increasing aftermarket demand due to strong air traffic growth and lower aircraft retirements.

Accordingly, the firm upgraded shares of the company from Neutral to Buy, with the price objective upwardly revised from $75 to $95.

The stance comes after a recent downgrade of the company's shares by Deutsche Bank, primarily due to valuation concerns.

BofA Merrill Lynch analysts Ronald Epstein, Kristine Liwag and Mariana Perez Mora noted that world passenger demand, as measured by revenue passenger kilometer, has been growing above the historical average year-over-year growth of 5 percent since 2010.

Specifically, the year 2016 saw 6.3 percent RPK growth and the year-to-period has seen 7.9 percent growth, the analysts said, citing industry body IATA data.

The analysts also indicated that aircraft retirements numbered 203 as of August 14, 2017, down 31.9 percent year over year. This compared to a 19.8 percent decline in 2016 and a 3.8 percent drop in 2015.

This is seen supporting Heico, which is a provider of FAA-approved aircraft replacement parts and aircraft accessories component repair & overhaul services for avionic, electro-mechanical, flight surface, hydraulic and pneumatic applications.

See also: Airline ETF Looks To Take Flight In 2017

Active M&A Pipeline

BofA Merrill Lynch noted that Heico entered into a stock purchase agreement to buy 100 percent of AeroAntenna Technology for $316.5 million in cash and a $20 million additional contingent cash earnout payment. The firm said it is not including the acquisition in its model now, although the deal is expected to close in the fourth quarter of 2017 and be accretive to earnings within the first year following the closing.

Estimates Raised

Reflecting higher sales $1,519 million versus $1,474 million previously, BofA Merrill Lynch raised its 2017 earnings per share estimate from $2 to $2.10. The firm attributed the revision to strong aftermarket replacement parts, repair and overhaul parts and services within Flight Support Group.

Additionally, higher operating margin of 20.1 percent compared to the previous 19.8 percent supported the positive view, the firm said.

In the outyears, the firm continues to expect sales growing at a CAGR of 6 percent in 2017-2021 and operating profit margin to be 7 percent. Accordingly, the firm raised its earnings per share estimate for 2018 from $2.20 to $2.25, for 2019 from $2.40 to $2.45, for 2020 from $2.60 to $2.65 and for 2021 from $2.85 to $2.90.

"In our view, HEI's premium to the market reflects the opportunities from continuing growth of the PMA (part manufacturer approval) business, the emerging increase in aftermarket demand due to strong air traffic growth and lower aircraft retirements, and upside to our estimates from future acquisitions," the firm concluded.

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Image Credit: By The original uploader was Heico at German Wikipedia (Transferred from de.wikipedia to Commons.) [CC BY-SA 2.0 de (http://creativecommons.org/licenses/by-sa/2.0/de/deed.en)], via Wikimedia Commons

Latest Ratings for HEI

DateFirmActionFromTo
May 2020Canaccord GenuityMaintainsHold
May 2020SunTrust Robinson HumphreyDowngradesBuyHold
May 2020Canaccord GenuityDowngradesBuyHold

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